2a. Time value of money.pptx

TIME VALUE OF MONEY  MEANING Money has time value. The value of a rupee received today is different from (higher) the value of rupee to be received after one year. It means a rupee received today has more value than a rupee received after sometime.  COM...

TIME VALUE OF MONEY  MEANING Money has time value. The value of a rupee received today is different from (higher) the value of rupee to be received after one year. It means a rupee received today has more value than a rupee received after sometime.  COMPOUNDING It is the process of finding out the future value of an initial sum of money after a period of time.  DISCOUNTING It is a process of finding out the present value of cash inflows of a proposal (project/investment) over a period of time.  ANNUITY It is a series of equal amount payable or receivable at regular intervals of time. Example – yearly, half-yearly, quarterly, monthly. It is the fixed sum of money payable or receivable at regular intervals of time. Example – payment of premium by a policy holder on his life insurance policy, annual payment made by life insurance company to a holder of an annuity policy for a specified number of years, equal amount of rent payable by tenant to his landlord, EMI of loan repayable by a borrower to the lender, etc.  REGULAR ANNUITY/ IMMEDIATE ANNUITY It is an annuity where payments or receipts of cash occur at the end of each interval of time. Example – Salary paid or received at the end of every month.  ANNUITY DUE It is an annuity where the amount payable/receivable occurs at the beginning of each interval of time. Example – instalment payment of a hire purchase or instalment purchases.  DEFERRED ANNUITY An annuity which will take affect after a certain period. Example – Pension received after retirement.  ANNUITY CERTAIN When an annuity is payable or receivable for a specified number of period. Example – paying/receiving EMIs for a certain period.  ANNUITY CONTINGENT An annuity payable or receivable till the happening of certain contingency or events. Example – Insurance amount payable/receivable only after death or occurrence of an event.  PERPETUAL ANNUITY/ PERPETUITY When the annuity is to continue forever in perpetuity, the annuity is called perpetual annuity or perpetuity. Example – Endowment fund created for awarding prizes.